The Connection Between Venture Capital and Diverse, Dense Communities

As cities and metros around the country and the world try to bolster innovation, spur entrepreneurship, encourage venture capitalism, and generate more start-ups, an important question to ask is: What are the key characteristics of leading-edge start-up cities and their ecosystems?

In previous posts, I've mapped the geography of venture capital investment and start-up activity across U.S. metros and global cities. My task now is to break down the characteristics of metros that are associated with higher levels of venture capital investment and high-tech start-ups.

To get at this, my Martin Prosperity Institute colleague Charlotta Mellander ran a correlation analysis of the economic, demographic and social factors that are associated with venture capital investment across metros. Obviously, bigger metros will attract more venture capital on balance. To control for this statistically, Mellander ran a partial correlation analysis that controls for metro population. The two correlations I'll list in parenthesis below cover the number of venture capital investments as well as the dollar amount of these venture capital investments. As usual, I emphasize that correlation does not equal causation. Still, the results point to some interesting new patterns and insights.

Venture capital investment, it has long been said by those in the business, follows the quality of deals. So it is not surprising that we find venture capital investment to be significantly associated with both levels of metro innovation and high-tech industry, being correlated both with patents per capita (.51, .43) and even more so with the concentration of high-tech industry (.77, .70). This is squarely in line with studies that have found that venture capital investment is attracted to areas with large clusters of high-tech industries and high levels of innovation.

Also not surprisingly, venture capital investment is more likely in more affluent metros, being closely correlated with both metro incomes (.56, .50) and wages (.69, .60). My hunch is this relationship goes both ways, and also reflects the greater concentration of high-tech industry in venture capital metros.

Venture investment tracks the geography of talent, being correlated with the percentage of adults who are college grads (.55, .50) and the percentage of the labor force holding knowledge-work jobs in the creative class (.57, .50) — spanning science and technology, management, the professions, and arts, media and entertainment. It makes intuitive sense that venture capital is drawn to talent pools in great cities and also around great research universities and college towns.

More interesting is the fact that venture capital investment is associated with specific clusters of creative class occupations, according to Mellander's analysis. Venture capital investment, not surprisingly, is most closely associated with concentrations of science and technology workers (.46, .44). But venture investment is also closely associated with business and management occupations (.58, .52) and also with arts, media and entertainment occupations (.57, .47). These results likely reflect the increasingly multifaceted nature of great start-ups as attractive venture investments. Management talent is crucial to the success of start-ups. Venture capitalists point out time and time again that a solid management team is as important, if not more important, to business success as a having cutting-edge technology. Success in a growing number of high-tech fields demands not just great technology but innovative, user-friendly designs. Steve Jobs long credited his arts and design background and training as key to his success in creating market-defining products from the Macintosh to the iPhone and iPad, and Apple reflects the synergies that come from integrating scientific and technological, arts and design, and business management creativity and skill.

While many economic developers and mayors in cities across the United States and the world have pinned their hopes on the role of so-called "eds and meds" — higher education and medical institutions — in spurring high-tech development, Mellander's analysis finds no significant statistical association between eds and meds employment and venture capital investment across metros.

Venture capital and investment and start-up activity is also associated with the diversity and openness of metros. Venture capital investment is positively correlated with the share of adults who are foreign born (.49, .46) and also with the share of gays and lesbians (.48, .46) in the population. A number of studies have documented the large share of foreign-born engineers in high-technology fields, and immigrants make up a considerable share of the founders of high-tech start-up companies. My own research [PDF] with Gary Gates has previously documented the association between high-tech industry and diversity, including openness to toward gays and lesbians. The reason for this is not that gays and lesbians are more likely to start high-tech companies or attract venture capital investment, but that both high-tech start-ups and demand for venture capital are more likely in regions that are open to new ideas and accepting of varied sorts of people. These kinds of locations have the underlying openness to innovation and risk that attract entrepreneurs.

Venture capital metros are also more liberal in their political orientation, according to Mellander's analysis. Venture capital investment reflects America's red/blue divide. It is positively associated with the share of Obama votes (.40, .28) and negatively correlated with Romney's share (-.40, .-.29). This result likely reflects that fact that more liberal political orientations are also associated with more educated, diverse metros.

Quite interestingly, Mellander's analysis suggests that venture capital investment and start-up activity are associated with urban form and structure, but not in the way many might predict. It's long been argued that start-ups and venture capital-financed high-technology prefer suburban office park locations, the "nerdistans" of California’s vaunted Silicon Valley, where Intel, Apple, Google and Facebook have their headquarters; along the Route 128 tech corridor near Boston; in Redmond outside Seattle, where Microsoft’s vast headquarters is located; in the suburbs surrounding Austin, and in the North Carolina Research Triangle.

But Mellander's analysis finds little evidence of this suburban nerdistan orientation for venture capital and start-up activity. For one, venture capital investment is positively associated with both density measured as people per square mile (.52, .38) and even more so with population-weighted or concentrated density (.64, .55).

In addition to this, there is an interesting connection between the way we commute and the geography of venture capital investment and start-up activity. Venture capital investment, according to her analysis, is negatively associated with the share of commuters who drive to work alone (-.49, -.45), a key indicator of sprawl and of nerdistans, and modestly associated with those who bike to work (.17, .19), another proxy for density of the sort found in big cities and college towns. Taken together, these findings are suggestive of an urban shift in venture capital and start-up activity. The reasons for this, as I've noted previously, include the urban preferences of a growing segment of tech talent, the changing nature and speed of technology, and the tight clustering of end-users and consumers in urban centers — a subject I will cover in much greater detail in upcoming posts which use area code and zip code-level data to look more closely into the micro-geography of venture capital and start-ups.

When all is said and done, venture capital and start-up activity today is associated with denser, more talent-driven, more diverse and innovative metros, reflecting the increasingly spiky nature of America's economic landscape.

This is the fifth in a series of posts exploring the new geography of venture capital and high-tech start-ups, and the degree to which these start-up communities are shifting from their traditional locations in the suburbs to urban areas.

About the Author

Richard Florida is a co-founder and editor at large of CityLab and a senior editor at The Atlantic. He isthe director of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at New York University.More